Editorial: Embrace the new normal of borrowing costs
Taming inflation has been among the biggest challenges of the post-COVID economy. In an otherwise resilient economy (historically low unemployment, high consumer confidence and spending), rising prices have kept the Federal Reserve’s finger on the trigger, leaving interest rates high, and nearly all businesses are feeling the heat.
The Fed’s efforts to bring down inflation by raising interest rates in 2022 and 2023 may have kept the economy from overheating, but it has caused some pain. Banks responded to the rising interest rates by raising the cost of borrowing. To no one’s surprise, the already tight housing market clamped up further, planned construction projects were put on hold, and businesses held off on large capital expenditures while waiting for rates to tick down. We’re still waiting.
The tight economy may be loosening soon, but in order for that to happen, Central Massachusetts business leaders will need to embrace a new normal of borrowing costs and move forward with their plans.
The Fed is planning to lower interest rates at some point this year, as WBJ Correspondent Livia Gershon writes in her “Watching the Fed” story. Central Massachusetts banks are eagerly anticipating this change, as it will allow them to lower borrowing costs for their business and retail customers. Still, we won’t see the historically low borrowing rates from a few years ago – as dropping rates too quickly creates a different set of problems. Regardless, the prime lending rate should tick down some - perhaps dropping a percentage point from the current 8.5%.
But 7.5% would still be a far cry from low rates seen as recently as 2021 where the prime bottomed out at 3.25%, but for businesses and industries waiting to undertake major capital projects, any lowering of rates will help loosen the purse strings. Commercial lending is a key driver of economic output, and businesses that can approve spending initiatives with slightly lower rates will add needed fuel to grow investment and take some of the pressure off other borrowers. Investors can’t sit on the sidelines hoping for a return to the low, low rates we saw over the last decade. Those won’t come back anytime soon.
If you want to know more about the future direction of the economy locally and nationally, WBJ is hosting its annual Economic Forecast Forum the morning of Feb. 29 at the AC Hotel by Marriott Worcester, with a keynote speaker from the Federal Reserve Bank of Boston and a panel of industry experts offering their takes on what’s ahead in 2024. We hope you can join us, and despite major challenges in a variety of sectors, we can learn how we all can contribute to keeping our overall positive economic momentum moving forward.
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